Yellen’s Mandate: Massive Stimulus, Assuaging Fears of Inflation

“Out of the box” is one of Janet Yellen’s favorite phrases, her fellow economists say—as in, think outside of it. And now the Yale-educated economist who made history in 2014 by becoming the first female Federal Reserve chairman is expected to do so again—think outside the box as President-elect Joe Biden’s nominee for Treasury secretary (also as the first woman in that post).

Because by the time she is sworn in early next year—her confirmation is considered highly likely—the U.S. and world economies might be facing a new wave of pandemic-induced unemployment.

“She’s a great choice. She understands that the main challenge facing America is generating growth that includes everyone, and she has an evidence-based approach to making policy,” said economist Karen Dynan,  a former Federal Reserve and Treasury official now at Harvard. 

“Pushing through more fiscal stimulus is going to be a high priority on her agenda. The economic harm from the enormous job losses we’ve suffered since the pandemic began has been mitigated by the fiscal measures put in place last spring but the cushioning provided by those policies is rapidly playing out.”

Indeed the endless dickering between current Treasury Secretary Stephen Mnuchin and House Speaker Nancy Pelosi has led to no subsequent program, suggesting that by Biden’s inaugural day Jan. 20 the need will be desperate if the $2 trillion CARES Act remains the lone response. 

Yellen, 74, has primarily been a labor economist academically from the old progressive tradition of believers in Keynesian, counter-cyclical stimulus. And many economists say she’s the right fit for the job ahead because she understands as well as anyone—especially due to her recent stint at the Fed—that the economy needs massive deficit spending right now, and that the fiscal side must rescue the monetary side, which is running out of tools. She also understands that the national balance sheet can sustain such stimulus spending: Federal budget deficits no longer are as dangerous because low interest rates make them more manageable and private sector lending isn’t being crowded out. Inflation is not an immediate danger. Yellen herself has warned in the past decade that fiscal stimulus plans were being dragged down by super-antiquated fears of debt and inflation.

Because of her long Fed experience and reputation as a data-based moderate, the markets will likely have faith in Yellen’s credibility to hold that line but pull out all the stops to avert another recession. “She cared about labor markets and economic pain when she was at the Fed,” said Wendy Edelberg, former chief economist at the Congressional Budget Office. “Those priorities are just what we need right now.”

As Fed chairman, Yellen was widely praised for growing the labor market while keeping inflation historically low. She was in particular lauded for striking a delicate rhetorical balance between progressives, constantly warning the labor market has “yet to fully recover” (thus pleasing progressive economists who played down inflation fears), but also warning that inflation might be a problem in the future (thus placating fiscal hawks). She came up with new ways of assessing the labor market more qualitatively, devising a metric of 19 different indicators under a “Labor Market Conditions Index,” though this was later dropped as a measure.

Even so, studying the unemployment problem has long been her concern. According to colleagues I spoke to for a profile of Yellen that appeared in National Journal and the Atlantic in 2013, she takes the nation’s worst problems, especially chronic unemployment and underemployment, as a deeply personal challenge.

 “How deeply you care about the unemployed comes in part from your viscera rather than your intellect. And with Janet Yellen, it’s very strong,” Alan Blinder, a Princeton professor and Yellen’s former Fed colleague, told me then. “She spent a good part of her career studying why unemployment stays high. I can remember a conversation between the two of us at the Fed in the  Nineties—I was vice chairman and she was a governor. One day, we tried holding back [the Federal Open Market Committee, the Fed’s chief decision-making body] from going overboard on raising interest rates. She said, ‘Maybe we saved 500,000 people their jobs.’ “

Indeed, Yellen’s main work as an academic focused largely on studying the nature of unemployment.  One of her most important papers, written with her husband, Nobel Prize winner George Akerlof, showed that workers who feel underpaid will be less productive. Before that she ran the Council of Economic Advisers under former President Bill Clinton, who managed to produce more equalized wage growth in his final years in office. But now that her main task will be to manage the fiscal side, her more than 10-year-long Fed experience will also go a long way toward assuring Wall Street about her fiscal program. 

Yellen is also known to take a tough stance on banking regulation, which could prove crucial in the months ahead since she will be the chair of the financial stability oversight council (“FSOC”), which consists of the 12 major bank and market regulators. 

Trump has spent four years trying to roll back those regulations, but “in the face of a feared oncoming massive COVID-led recession or  depression, systemic risk and market collapses are much more likely now,” said former federal financial regulator Michael Greenberger. 

“So FSOC will have its hands full restoring the many Dodd Frank regulations that really did protect against chain reaction systemic breakdowns.” 

“So this is a big task for Yellen,” added Greenberger. “And no one is better equipped to deal with all of these tasks.”